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Wednesday, April 30, 2014

Hundreds of City institutions registered interest in Royal Mail shares in the run up to one of the most controversial privatisations this century.

They were joined by hundreds of thousands of ordinary members of the public.But most investors, whether big or small, went away empty-handed because the float was oversubscribed 23 times.Some 17 institutions were given “priority investor status” by Goldman Sachs and UBS the Royal Mail’s global co-ordinators (GloCos). These 17 institutions, in Vince Cable’s words were “the high quality institutions of the type that would form the core of a long-term supportive investor base.”...

Eight of the nine classes are hidebound by conventions, neofeudal and neocolonial arrangements and a variety of false choices.

There are many ways to slice and dice America's power/wealth hierarchy. The conventional class structure is divided along the lines of income, i.e. the wealthy, upper middle class, middle class, lower middle class and the poor.

I've suggested that a more useful scheme is to view America through the lens not just of income but of political power and state dependency, as a Three-and-a-Half Class Society(October 22, 2012):

The three-and-a-half class society is comprised of: the "entrenched incumbents" on top (the "half class"), the high-earners who pay most of the taxes (the first class), the working poor who pay Social Security payroll taxes and sales taxes (the second class), and State dependents who pay nothing (the third class).

This class structure has political ramifications. In effect, those paying most of the tax are in a pressure cooker: the lid is sealed by the "entrenched incumbents" on top, and the fire beneath is the Central State's insatiable need for more tax revenues to support the entrenched incumbents and its growing army of dependents.

To be sure, everyone disagrees with 10-20% of Piketty’s argument, and everyone is unsure about perhaps another 10-20%. But, in both cases, everyone has a different 10-20%. In other words, there is majority agreement that each piece of the book is roughly correct, which means that there is near-consensus that the overall argument of the book is, broadly, right.

Unless Piketty’s right-wing critics step up their game and actually make some valid points, that will be the default judgment on Piketty’s book. No amount of Red-baiting or French-bashing will help.

Project SyndicateThe Right’s Piketty ProblemJ. Bradford DeLong | Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research. He was Deputy Assistant US Treasury Secretary during the Clinton Administratio

Solow seems to be onto something: the source of the salary incomes of the top 1 percent is just as much capital as are the other sources of their income, such as profits, dividends, interest, rent, and capital gains. All of them—including the salaries of “supermanagers”—represent distributions of the surplus initially appropriated by capital.

Therefore, as Solow concludes, “it is pretty clear that the class of supermanagers belongs socially and politically with the rentiers, not with the larger body of salaried and independent professionals and middle managers.”

Ya think? As we've been saying here for a long time. Power, including corporate power, is the basis of rent extraction. Solow sees the situation but it seems he can't really admit to himself why, since power and rent don't figure in conventional models.

Maybe now that Piketty has pointed out somethings of interest, the investigation will get real and go deeper. but I doubt it. Conventional economics is shown to be vapid speculation about a fantasy world as soon as power and economic rent are introduced. They just are not going to go there.

Can it be true that capitalists prefer crisis over growth? On the face of it, the idea sounds silly. According to Economics 101, everyone loves growth, especially capitalists. Profit and growth go hand in hand. When capitalists profit, real investment rises and the economy thrives, and when the economy booms the profits of capitalists soar. Growth is the very lifeline of capitalists.

Or is it?

What motivates capitalists?

The answer depends on what motivates capitalists. Conventional economic theories tell us that capitalists are hedonic creatures. Like all other economic “agents” – from busy managers and hectic workers to active criminals and idle welfare recipients – their ultimate goal is maximum utility. In order for them to achieve this goal, they need to maximize their profit and interest; and this income – like any other income – depends on economic growth. Conclusion: utility-seeking capitalists have every reason to love booms and hate crises.

But, then, are capitalists really motivated by utility? Is it realistic to believe that large American corporations are guided by the hedonic pleasure of their owners – or do we need a different starting point altogether?

So try this: in our day and age, the key goal of leading capitalists and corporations is not absolute utility but relative power. Their real purpose is not to maximize hedonic pleasure, but to “beat the average.” Their ultimate aim is not to consume more goods and services (although that happens too), but to increase their power over others. And the key measure of this power is their distributive share of income and assets.

Conventional theories of capitalism are mired in a deep crisis: after centuries of debate, they are still unable to tell us what capital is. Liberals and Marxists both think of capital as an 'economic' entity that they count in universal units of ‘utils’ or 'abstract labour', respectively. But these units are totally fictitious. Nobody has ever been able to observe or measure them, and for a good reason: they don’t exist. Since liberalism and Marxism depend on these non-existing units, their theories hang in suspension. They cannot explain the process that matters most – the accumulation of capital.

This book offers a radical alternative. According to the authors, capital is not a narrow economic entity, but a symbolic quantification of power. It has little to do with utility or abstract labour, and it extends far beyond machines and production lines. Capital, the authors claim, represents the organized power of dominant capital groups to reshape – or creorder – their society.

Written in simple language, accessible to lay readers and experts alike, the book develops a novel political economy. It takes the reader through the history, assumptions and limitations of mainstream economics and its associated theories of politics. It examines the evolution of Marxist thinking on accumulation and the state. And it articulates an innovative theory of 'capital as power' and a new history of the 'capitalist mode of power'. (download PDF)

Article one is by two professors of political economy, Shimshon Bichler and Jonathan Nitzan. Bichler teaches at colleges and universities in Israel, and Nitzan at York University in Canada. Article two is by U.S. economist Michael Hudson.

These two articles actually cover quite a lot of ground. Our reader correctly notices an echo of the views of the 19th-century American reformer Henry George. We can also see in these articles the influence of the Monthly Review School. The article by Bichler and Nitzan contains a long and I think revealing self-critical quote by Paul Sweezy that points straight to the weakness of the Monthly Review School.

Therefore, in these two articles we are dealing with three tendencies. One tendency represents the views of Shimshon Bichler and Jonathan Nitzan . A second tendency is the viewpoint of Michael Hudson, and a third the Monthly Review School of Baran and Sweezy and their successors at Monthly Reviewmagazine. Of the three tendencies, only one, Paul Sweezy and his Monthly Review School, is considered a tendency within Marxism. Neither Bichler, Nitzan nor Michael Hudson are Marxists.

Again, I like Piketty’s book overall but I really don’t think his macroeconomic credentials are up-to-scratch. This leads to a lot of silly sections and a lot of misleading interpretations....

Thus, Piketty’s should be seen as one of those books that will open discussion on a topic without much contributing to it....

For those of us interested in the study of inequality this is wonderful. Although expect a debate that has been taking place behind the scenes in a very focused manner to quickly become filled with sludge as every crackpot economist puts forward their little model explaining, in one fell swoop, the rise of income inequality while simultaneously handing us the silver bullet to rid us of it.

The essence of Keynes’ economics was the liquidity preference theory of interest rates and rejection of the claim that price and nominal wage flexibility would ensure full employment. New Keynesians abandon both. They replace liquidity preference theory with loanable funds interest rate theory and they use price and nominal wage rigidity to explain cyclical unemployment.

I have long argued that the new Keynesian nomenclature is a cuckoo tactic because it captures the Keynesian label while having nothing to do with Keynes, in a manner similar to the cuckoo which lays its eggs in other birds’ nests. In my view, it is better labeled new Pigovian economics since it relies on market imperfections and frictions, which were the hallmarks of Pigou’s economic thinking. That makes for bitter irony as Pigou was Keynes’ greatly respected intellectual opponent in the 1930s and his thinking now passes under the Keynesian banner, displacing Keynes’ own ideas.

Pincer movement to encircle and weaken Russia and China to preserve US global hegemony.

US provocations in Ukraine cannot be understood apart from Washington’s “Pivot to Asia”, which is the broader strategic plan to shift attention from the Middle East to Asia. The so called “re-balancing” is actually a blueprint for controlling China’s growth in a way that is compatible with US hegemonic ambitions....

So what does controlling China have to do with the dust up in Ukraine?

Everything. Washington sees Russia as a growing threat to its plans for regional dominance. The problem is, Moscow has only gotten stronger as it has expanded its network of oil and gas pipelines across Central Asia into Europe. That’s why Washington has decided to use Ukraine is a staging ground for an attack on Russia, because a strong Russia that’s economically integrated with Europe is a threat to US hegemony. Washington wants a weak Russia that won’t challenge US presence in Central Asia or its plan to control vital energy resources....

What matters is global hegemony and world domination. That’s what really counts. Everyone knows this. To follow the daily incidents in Ukraine as though they could be separated from the big picture is ridiculous. They’re all part of the same sick strategy. Here’s a clip from former US national security adviser Zbigniew Brzezinski in Foreign Affairs explaining how–as far as Washington is concerned–it makes no sense to have separate policies for Europe and Asia:

“With Eurasia now serving as the decisive geopolitical chessboard, it no longer suffices to fashion one policy for Europe and another for Asia. What happens with the distribution of power on the Eurasian landmass will be of decisive importance to America’s global primacy and historical legacy.” (“The danger of war in Asia“, World Socialist Web Site)

Tuesday, April 29, 2014

An economic model is a sort of parable. Intuitively, every economist should know this. You lay out assumptions — that is, a framework for a logical narrative — and then you follow these assumptions through to the narrative endpoint. But the assumptions are not arbitrary. Indeed, I would argue that they are key to the whole model and to what it conveys.

Think of this like a film script. The assumptions give the story a narrative structure. Thus they determine whether the model is Sraffian or Marxist or marginalist, in the case of economics, and whether the film is a horror, a comedy or a romance, in the case of a film script. The different narrative structures — or genres, if you like — convey different things to the people who use them.

Key observation. Constructing mathematical models does not mean that they are not narratives based on a POV determined by the assumptions.

Now, if the 1 percent made their money–you know, they call themselves job creators as if they’re creating the prosperity, but they’re not creating the prosperity, because what they’re getting is interest and economic rent much more than profits. They’re getting rich in an exploitative way, not in a productive way that helps the economy grow and raises living standards....

You don’t want to tax people building factories and improving living standards like the one percent pretend that they do, but what you do want to tax is unearned income, economic rent, capital gains....

What Piketty does not suggest is getting rid of regressive taxes like the FICA wage withholding that everybody has to pay that’s now more than 15 percent of their paycheck. This is a regressive tax. That should be gotten rid of.

But most of all, he doesn’t talk about the whole restructuring that’s part and parcel of this neoliberal revolution to privatization. He doesn’t criticize privatization. And most of this increased wealth by the 1 percent since 1980 is all taken–a result of privatizing the public domain–public utilities, things that–100 years ago everybody expected banking to be a public utility, roads, railroads, public transport, telephone systems, broadcasting systems. Now that these are being monopolized, the rich are getting their money by monopoly rents.

Michael HudsonThe 1% and Piketty
Jessica Desvarieux interviews Michael Hudson, research professor of economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College

Barack Obama ended an Asian tour Tuesday with a warning to China against using force in territorial disputes, as Chinese authorities accused the US president of ganging up with "troublemaking" allies. The barbs ensured a tense finish to a four-nation…

A Nevada congressman contacted law enforcement saying supporters of rancher Cliven Bundy have set up checkpoints for drivers’ “residency” before letting them pass, KVVU-TV reported on Monday. Rep. Steven Horsford (D-NV) expressed his concerns…

Despite some losses to financial capital during the Great Depression, the more powerful era of equality in the U.S. began during World War II.

Robert Kuttner makes the liberal (Keynesian) case.

For instance, in the need to invest in a green transition is there a possible strategy analogous to what the U.S. achieved during World War II to use public capital to produce both social gains and a more equal distribution of wages? In his treatment of growth and public capital, Piketty accepts the conventional view that mature economies by definition operate at the frontier of technical possibility. But the new and important book The Entrepreneurial State by Mariana Mazzucato suggests that this is not necessarily so. Private capital is myopic when it comes to long-term pursuit of technological breakthroughs. That’s why so many of the core innovations of the postwar era were the fruit of patient public capital and public risk-taking. Is it only during depressions and wars that public investment can make up for private market failures, or can public capital increase productivity growth, employment, and expand the technology frontier on an ongoing basis? Piketty commends “new forms of democratic control of capital” (otherwise unspecified) but does not address whether more government support for technical advances could improve the market rate of innovation and productivity growth....

In a short interview, Piketty says that his discussion of the postwar recovery missed some of the political story, and he regrets understating the important role of unions and shifting power relations. He adds in an e-mail message, “I probably suggest too much that recovery was mostly mechanical, which is excessive. More inclusive institutions and better regulation policies did promote [postwar] mobility and growth.” He also says he favors of some kind of green transition, led by public capital.

If we want a more equal society, we need to understand both the institutions and the politics that once undergirded greater equality. Yes, there was the historical accident of two wars and the effect on inherited wealth, but there was also the effort of both statesmen and organizers to maximize the opportunity that history offered.

American ProspectWhat Piketty Leaves Out
Robert Kuttner | co-founder and co-editor of The American Prospect, as well as a distinguished senior fellow of the think tank Demos

Despite these criticisms of Piketty’s theoretical framework and policy recommendations, one should not dismiss the contribution he has made with this book. Capital in the Twenty-First Century is a significant contribution to our understanding of the distribution of wealth and income — in particular, in his evidence suggesting that there is no inherent tendency for the distribution of income and wealth to become less unequal as countries grow. In addition, the sheer volume of data Piketty has compiled and summarized in this text is a significant contribution to economic science. Nonetheless, there is much work to be done in understanding the mechanisms that lead to inequality, and the policy implications thereof.

National Review OnlineUnequal to the Task Joshua Hendrickson | Assistant Professor of Economics at the University of Mississippi

Piketty’s argument is convincing and well-supported. So what is the debate over? Much of the critical response to Capital has focused on Piketty’s “r > g” equation and what “r,” the rate of return on capital, is doing in Piketty’s story. Generally, critics have come at him from two different directions. Though these debates aren’t necessarily ideological, the directions tend to be affiliated with the right and the left respectively....

... the book is an attempt to ground the debate over inequality in strong empirical data, put the question of distribution back into economics, and open the debate not just to the entirety of the social sciences but to people themselves. As Piketty says, the distribution of wealth “is too important an issue to be left to economists, sociologists, historians, and philosophers. It is of interest to everyone, and that is a good thing.” He is right....

If economists to Piketty’s right are concerned that he doesn’t ground his theory deep enough in economic models, economists and others to Piketty’s left are concerned that he concedes too much to mainstream economics and not enough to politics.

So, while economists to Piketty’s right think he should create a model that predicts the rate of return on capital (his r) based on the state of the economy, rather than historical data, economists to Piketty’s left want him to emphasize the idea that many different rates of return are consistent with the character of the economy; “r” is a function of institutions and political decisions. Those on the left also worry that the debate over Capital could devolve into, as the economist Suresh Naidu argues, a “bastard Pikettyism” that just navel-gazes at the mathematical economic models discussed above, instead of a more critical, broader inquiry of how capital works in economies and societies....

These passages surely suggest that Piketty believes that “r” is not simply a fixed economic parameter, and that something can be done about “r” as a political project. Why doesn’t Piketty embrace this idea, or at least make more of it in his theory?

The answer is partially driven by the numbers. If “r” is consistent across countries and centuries with radically different infrastructures, institutions, philosophies, and populations, structural and institutional changes are unlikely to make a big difference. Piketty emphasizes that the trends he finds are not the result of the various “market imperfections” that economists break out to justify government action. If anything, he argues, a more efficient market could increase the rate of return on capital and accelerate inequality.

Though he equivocates on this point, the text suggests that Piketty believes social democratic reforms outside high taxation are incapable of changing these dynamics....

This is a remarkable provocation for liberals. Piketty is, in a way, saying: go ahead and make whatever reforms you want. Break up the banks. Pass the campaign finance package of your dreams. Reach deep into the bag and pass all the non-reformist reforms that you can think of. All your reforms can’t guarantee that you are safe from the logic of r > g. Reforms won’t change the nature of capital: to accumulate, eat up a larger share of the economy, and let the past dominate the future.

Exactly. As I have been saying, capitalism is antithetical to liberal democracy and reforming it won't work, at least for very long. Palliatives are no panacea. Either liberal democracy survives or capitalism survives, but both cannot live together for long. As long as money and machines are valued over people, democracy will remain at unrealized ideal because democracy is based on a humanism that acknowledges human being as social being. Conversely, capitalism is based on an atomistic mechanism that is driven by individual self-interest expressed as utility maximization where utility is defined materialistically. The difference is profound because at its basis it a distinction between spirituality in the broad sense acknowledging "the human spirit" and materialism in the sense of viewing humans as large animals that have dominated their environment and a few have dominated the others, which is the objective.

Mike Konczal is at his best doing political analysis.

Policies evolve from identifying a problem. Whether or not it is feasible, Piketty’s suggestion for a global wealth tax evolves from identifying the problem as global and systemic. And here I think this book signals a major change in the debate over inequality.

First, the rosy picture that economists have painted about the nature of inequality has been displaced. The idea that labor’s share of the economy is more or less fixed, an essential element of the mantra that a rising tide lifts all boats, has been dealt a serious, if not fatal, blow.

The idea that the inequality is necessary for a well-functioning society has also been thrown into question. In the wake of the financial crisis and Great Recession, more and more research institutions are finding that higher equality corresponds to better growth, or at least has no negative effect. The causation here might be difficult to prove, but the research suggests that we can no longer take for granted that that growing inequality is a necessary evil for a better economy.

Second, the debate over wealth and taxes is back. Many economists argue that capital income shouldn’t be taxed at all, since it is unfair to tax people because they happen to save, as if it is simply a choice in the marketplace. There are, however, significant advantages to owning wealth, including security, political power, the ability to direct private investment, and much more. These benefits need to be subject to democratic scrutiny....

What seems to escape the attention of most is that the issue is not only the relationship of the rate of increase in wealth to the increase in growth. It is also the source and use of wealth. Is the source economic rent or is it equitable return on productive investment? Is the use simply to increase luxur consumption, add to savings and increase status and power, or is it to invest in innovation in a truly competitive environment?

Capital committed to productive investment increases growth and much of that is in the form of gains due to the increasing value of ownership of the means of production. Much of this remains unrealized, and the gains are paper gains corresponding to increased capital formation, which is supposedly the purpose of capitalism. But wealth obtained from economic rents, in particular land rent, but also monopoly rent, financial rent and rents derived from other aspect of power, such as intellectual capital protected from competition through patents and copyrights, is unearned and unproductive. This is what we should be talking about in that it is undeserved.

This is a fairly long article and I have quoted from it liberally to summarize the main points, but you really should read the whole thing since it is spot on with respect to many key issues socially, politically and economically. There's a reason beyond rational disagreement. It also supports the cognitive work of George Lakoff concerning the differences between liberals' and conservatives' mindsets and attitudes that shape their opposing norms. Evolutionary biology suggests the reasons for thes differences arising in the evolutionary process, resulting in hereditary dispositional traits. While the science is somewhat speculative, I regard this a must read unless you want to sit down with the books that Chris Mooney draws upon.

Let’s begin with the large body of shared ground. Surveying the evidence with a fair mind, it is hard to deny that science is revealing a very inconvenient truth about left and right: long before they become members of different parties, liberals and conservatives appear to start out as different people....

The most rock-solid finding, simply because it has been shown so many times in so many different studies, is that liberals and conservatives have different personalities....

Several research groups have shown that compared with liberals, conservatives have a greater focus on negative stimuli or a “negativity bias”: they pay more attention to the alarming, the threatening, and the disgusting in life. In one experiment that captured this, Hibbing and his colleagues showed liberals and conservatives a series of collages, each comprised of a mixture of positive images (cute bunnies, smiling children) and negative ones (wounds, a person eating worms). Test subjects were fitted with eye-tracker devices that measured where they looked, and for how long. The results were stark: conservatives fixed their eyes on the negative images much more rapidly, and dwelled on them much longer, than did the liberals.Liberals and conservatives, conclude Hibbing et al., “experience and process different worlds.” No wonder, then, that they often cannot agree. These experiments suggest that conservatives actually do live in a world that is more scary and threatening, at least as they perceive it. Trying to argue them out of it is pointless and naive. It’s like trying to argue them out of their skin....In this context, Hibbing and his colleagues consider a variety of potential explanations for the stubborn fact that there is large, politically relevant psychological and biological diversity among members of the human species, and ultimately settle on a tentative combination of two ideas. First, they assert, conservatism is probably more basic and fundamental, because it is more suited to a world in which life is “nasty, brutish, and short.” Being defensive, risk aversive, hierarchical, and tribal makes sense when the threats around you are very real and immediate. As many of these threats have relaxed in modern times, however, this may have unleashed more variability among the human species, simply because now we can afford it. Under this scenario, liberals are the Johnny-come-latelys to the politico-evolutionary pageant; the Enlightenment itself is less than 300 years old, less than an eyeblink in evolutionary time. “Liberalism may thus be viewed as an evolutionary luxury afforded by negative stimuli becoming less prevalent and deadly,” write Hibbing et al....In other words, politics runs in families and is passed on to offspring. Hibbing and his coauthors suspect that what is ultimately being inherited is a set of core dispositions about how societies should resolve recurring problems: how to distribute resources (should we be individualistic or collectivist?); how to deal with outsiders and out-groups (are they threatening or enticing?); how to structure power relationships (should we be hierarchical or egalitarian?); and so on. These are, of course, problems that all human societies have had to grapple with; they are ancient. And inheriting a core disposition on how to resolve them would naturally predispose one to a variety of specific issue stances in a given political context.All of which brings us to the really big question. It is difficult to believe that systematic psychological and biological differences between those who opt for the left and the right in different countries—differences that are likely reflected in the genetic code—arose purely by chance. And yet, providing an evolutionary explanation for what we see is fraught with peril: to put it bluntly, we weren’t there. We didn’t see it happen....The answer, hints Tuschman in Our Political Nature, is that it may have been the liberals. For one core of the apparently universal left-right difference, he argues, is that the two groups pursue different reproductive strategies, different ways of ensuring offspring and fitness in the next generation.And thus we enter the realm of full-blown, and inevitably highly controversial, evolutionary explanations. Tuschman doesn’t hold back. Conservatives, he suggests in one of three interrelated evolutionary accounts of the origins of politics, are a modern reflection of an evolutionary impulse that leads some of us to seek to control sexual reproduction and keep it within a relatively homogenous group. This naturally makes today’s conservatives more tribal and in-group oriented; if tribalism does anything, it makes it clear who you are and aren’t supposed to mate with.Tuschman’s liberals, in contrast, are a modern reflection of an evolutionary impulse to take risks, and thereby pull in more genetic diversity through outbreeding. This naturally makes today’s liberals more exploratory and cosmopolitan, just as the personality tests always suggest. Ultimately, Tuschman bluntly writes, it all comes down to “different attitudes toward the transmission of DNA.” And if you want to set these two groups at absolute war with one another, all you need is something like the 1960s....Returning to the present, Tuschman emphasizes that conservatives, and especially religious conservatives, always want to seem to control and restrict reproduction (and other sexual activities) more than liberals do. It’s understandably hard for an evolutionary biologist not to see behaviors that systematically affect patterns of reproduction in a Darwinian light.And it’s not just reproductive patterns: Tuschman also suggests that other aspects of the liberal-conservative divide reflect other evolutionary challenges and differential strategies of responding to them. He traces different left-right views on hierarchy and equality to the structure of families (a move that cognitive linguist George Lakoff has in effect already made) and the effect of birth order on the personalities and political outlooks of siblings. And Tuschman traces more positive and negative (or, risk-aversive) views of human nature on the left and the right to different types of evolutionarily based altruism: altruism toward kin on the conservative side, and reciprocal altruism (which can be toward anyone) on the liberal side....

Brian provides an excellent summary of the financial system and the role of banks in it.

Whether banks are "special" is a fundamental theoretical question, and what side economists are on does not seem to be driven by politics or the mainstream/heterodox divide. The fact that the answer is somewhat ambiguous allows this division to remain.

I will discuss the implications in later articles. But it is clear that reforms need to take into account the fact that the formal banking system is not particularly special in terms of its role during an expansion. Aggressive regulation of the banking system, such as a 100% reserve requirement, would just drive activity into the shadow banking activities undertaken by both financial and "nonfinancial" firms. Such an outcome would probably make the inevitable future financial crises even worse.

Tyler Cowan complains that much of the debate about Thomas Piketty’s Capital in the 21st Century is ignoring the existing science on wealth inequality, which Cowan believes “has already offered a wide range of insights on these topics, as well as having rendered some of the more extreme claims unlikely.” And Cowan offers this paper by Ana Castañeda, Javier Díaz-Giménez and José-Víctor Ríos-Rull as an instance of the kind of science that is being ignored. Cowan says the paper he cites contains “a reasonably good and accurately calibrated model” and as a result “we already have a theory which does quite well in explaining U.S. wealth inequality, and it isn’t based on the total centrality of a comparison of r and g, as you find in Piketty.” And he complains that “no one in the current debates is citing this piece, Piketty included.”

But it doesn’t surprise me that serious researchers on wealth and income inequality would not cite the paper by Castañeda et al. Note this passage from footnote 10 in the paper:

Note that throughout this article our deﬁnition of earnings both for the U.S. and for the model economies includes only before-tax labor income. Consequently, it does not include either capital income or government transfers.

In other words, the authors’ model assumes there is no capital income or government transfer income, only labor income. That is a strange restriction to say the least....

With another $7,000 profit today on a position I just closed out in USD/CAD, that makes $54,000 total profit for April. Add that to the $26,000 profit in March and that $100 grand client account that opened up two months ago has now grown by $80,000.

In other words we already have a theory which does quite well in explaining U.S. wealth inequality, and it isn’t based on the total centrality of a comparison of r and g, as you find in Piketty. And no one in the current debates is citing this piece, Piketty included....

So much of the current Piketty debate is simply forgetting that…science exists and has already offered a wide range of insights on these topics, as well as having rendered some of the more extreme claims unlikely....

In the latest Dialogue with the Fed presentation, David Andolfatto asks: “Is bitcoin a ‘good money’?” According to Andolfatto, a good money should maintain stable purchasing power over short periods of time, with price-level stability depending both on money supply and money demand.

Advocates of bitcoin, he says, want a rigid supply—a supply that’s free of political manipulation. But, as Andolfatto points out, the cost of a rigid supply is an inability to respond to demand volatility. In the short run, money demand can fluctuate dramatically, which has happened with bitcoin. Andolfatto shows the short-run volatility of the purchasing power of bitcoin, as well as gold.

Then it comes time to offer up his ideas for a new economics paradigm:

Replace utility-maximizing economic man with a Darwinian fellow who simply wants to do better than the next guy.

Let this selfish creature fight it out in a macroeconomic model based on the circulatory system. “Capitalism would act to push wealth up the social pyramid,” Cooper writes, “while democracy, and its progressive taxation system, would act in the opposite direction to push it back down, causing a vigorous circulatory flow of wealth throughout the economy.”

So what makes modern capitalism work is not so much the accumulation of capital as its constant flow through the system. It’s an interesting thought. The basis of a new paradigm for economics? Hmmm. Cooper does his best to prep the reader by showing how intuitive and simple the insights of Copernicus, Darwin, and William Harvey (Charles I’s physician, who figured out how blood circulates through the body) were, but I still found his suggestions to be almost laughably crude. Maybe that’s just me. Or maybe it’s the natural initial reaction to a potential new paradigm.

I have not read a word of Thomas Piketty's Capital in the Twenty-First Century. As far as I can understand from secondhand and thirdhand accounts, it has something to do with outrage about the wealthy, measuring the rate of return on capital, and how we can tax those worthless wealthy bastards. The quotes and reviews on Amazon use words including "pioneering," "explosive," "seminal," "magisterial," etc. Some people want to petition the Pope to put Piketty in line for sainthood. This is pretty exciting. I think I should buy the book, and would be happy to contribute to Piketty's wealth. Hopefully he won't be successful in taxing himself back into poverty.

Tyler Cowen points out that there is a body of research studying wealth inequality, which apparently Piketty does not reference. This surprises me. After all, Paul Krugman (a very serious, straightforward, and trustworthy scholar, if there ever was one) points out that:...if you think you’ve found an obvious hole, empirical or logical, in Piketty, you’re very probably wrong. He’s done his homework!

This bears investigating, I think.

Stephen Williamson: New Monetarist EconomicsPiketty and the Macroeconomists
Stephen Williamson | Robert S. Brookings Distinguished Professor in Arts & Sciences and Director of Graduate Studies, Department of Economics, Washington University in St. Louis

The post speaks for itself without my making any snide remarks.

Oh, I just can't resist. Sounds like envy of someone else's success to me.

But, despite it’s search-engine popularity and the associated journalistic sensationalism, it’s not at all evident that we are witnessing the development of another speculative bubble. In fact, once you break down the facts, it turns out that the parallels are relatively few. That said, however, student debt loads are a problem, and a serious one. Not only do they create a significant drag on short-term economic activity, but they will stunt our long-term growth as well. And the situation is deteriorating. The disease is real, it’s just more subtle and insidious than a financial market boom and bust.

In the end, what is really driving Minnesota models is this distribution of different discount factors. So, it is at the bottom line that those on top are patient and willing to abstain while those at the bottom are short-sighted and impatient, tsk tsk. In this view, obviously the losers deserve what they (don't) get, while the virtuous rich deserve theirs. This is the Protestant Ethic triumphant!

Monday, April 28, 2014

Phil explains how the issues raised in the Cambridge capital controversy are relevant today in light of the debate around inequality.

The capital debates were, it should be said, about rather a lot of things. But the most immediate concern was with income distribution. The mainstream marginalist argument tried to show that income is passed over to the factors of production — that is, capital and labour — in line with their marginal productivities. This implies that under free-market conditions the income received by each factor is in line with what it should be for maximum efficiency. There is an implicit notion here that income distribution is thus fair.

Of course, marginalists do not (always) take this argument literally. There are plenty of ways of protesting against the levels of income distribution from within this framework. The most obvious that comes to mind — and that which was put forward by a key player in the debates Robert Solow — is that income inequality can arise due to past levels of income inequality.

That is all well and good but the theory still gets away from an obvious truth: a key component of income distribution is due to the relative power of labour and capital. Anyone who denies this basic fact is either blind, politically motivated or… a marginalist economist....

Economists need to stop telling themselves these silly little stories and chasing chimeras. If they are interested in what accounts for investment, technical change and capital accumulation then they should go and study it. Not through their silly little models. But by examining the facts and studying companies as institutions. Do surveys. Look for empirical correlations. Engage in some corporate anthropology. Just stop building stupid models.

Solow gives a summary explanation of Piketty's economics from the neoclassical POV and endorses its overall correctness, adding that predictions a century in advance are hypothetical but this is a plausible scenario unless conditions change.

In any case, it is pretty clear that the class of supermanagers belongs socially and politically with the rentiers, not with the larger body of salaried and independent professionals and middle managers. So Piketty’s foreboding vision of the twenty-first century remains to be dealt with: slower growth of population and productivity, a rate of return on capital distinctly higher than the growth rate, the wealth-income ratio rising back to nineteenth-century heights, probably a somewhat higher capital share in national income, an increasing dominance of inherited wealth over earned wealth, and a still wider gap between the top incomes and all the others. Maybe a little skepticism is in order. For instance, the historically fairly stable long-run rate of return has been the balanced outcome of a tension between diminishing returns and technological progress; perhaps a slower rate of growth in the future will pull the rate of return down drastically. Perhaps. But suppose that Piketty is on the whole right. What, if anything, is to be done?

“Our society will always remain an unstable and explosive compound as long as political power is vested in the masses and economic power in the classes. In the end one of these powers will rule. Either the plutocracy will buy up the democracy, or the democracy will vote away the plutocracy.” ~ Irving Fisher, 1919

That markets exist, indeed can only ever exist, inside a broader sociopolitical context disappeared altogether from mainstream economic thought. The consequence being, as I have said far too many times before, is that economists ended up studying only economics and not actual economies. Their models, large or small, formal or ad hoc, mathematical or narrative, all overlooked the sociopolitical impact subsequent policy advice derived from them might have. In this way economics became “performative” in that policy advice and the lessons learned in the classroom all had the effect of trying to bend society to conform to the ideal, rather than bending the ideal to conform with reality.

Economics became a massive social experiment. Economists began tinkering with society even while being oblivious to the fact that they were tinkering. Innocent or not – and I still believe that some economists knew full well they what they were doing – the mainstream drew to itself a massive ethical responsibility that it has never to this day recognized. Namely that if your advice is based upon some theory that assumes away most if not all social reality, and that it then has the effect of altering the reality it presumes to model, you had better be damned sure both theory and advice do no harm. Hiding behind idealized theoretical constructs is not acceptable. When you seek to bend real social relations to mimic those of your theory you had better be prepared to be called to task for any consequences society might not like. The loss of democracy being high on that list.

Or is it that many mainstream economists simply have a contempt for democracy because it muddies their pristine theoretical waters?

The post contains some excellent quotes about the intersection of culture, law and the economy.

Government layoffs, specifically, have carved a deep gouge in middle-class hiring in the years since the Great Recession, as a new report by the National Employment Law Project, a think tank focused on helping low-wage workers, shows....

This is the direct result of the austerity obsession Republican politicians mysteriously developed after the inauguration of President Obama in the middle of the financial crisis in 2009. They pushed to slash government spending, leading to job cuts at all levels of government -- exactly the wrong thing to do in the wake of the worst recession since the Great Depression.

Austerity crimped access to the decent-paying, middle-class jobs that are typical of government work. As NELP notes, many of the jobs lost were replaced by low-wage jobs. Middle-wage jobs accounted for 37 percent of job losses and just 26 percent of job gains in the past four years, while low-wage jobs accounted for 22 percent of job losses and 44 percent of job gains, according to the NELP report.

The blog-O-sphere has been lit up in recent days with Krugman’s announcement that he’s frustrated by the gloating of Heterodox Economists. He claims that with good hindsight, all the mainstream economists who “never saw the crisis coming” can use their flawed textbook approach to explain what happened. Gee, that makes me feel a lot better! So we don’t need to listen to those heterodox types who actually saw it coming, any more. Forget Minsky! Go back to ISLM models! Models that do not have banks–let alone shadow banks–or the potential for financial crises.

I met Congressman Michael Grimm (R-NY) several times while I was still at Fox News. I never liked or trusted him. He was a cocky dude and a diehard austerity pusher. "Too much spending, we gotta cut, balance the budget," blah, blah, same talk as all the other sadistic Conservative cretins. He didn't care who got taxed (yes, spending cuts are tax increases): seniors, students, children, needy families, as long as it wasn't his rich NY friends. They got to keep whatever.

Well it looks like Grimm has now been indicted on charges of Federal tax evasion, lying to authorities. He kept two sets of books of course at his Manhattan restaurant so he could show one to the IRS and keep the real money for himself. (What? Tax me???)

Another classic hypocritical asshole. No problem taking money from the needy and regular working stiffs, but the millionaires...they get to keep it all.

I wrote about this dude along with other Conservative cretins like NJ Governor Chris Christie (here and here) in several posts last year.

Grimm may be finally getting his due, but he won't go quietly. The guy is running for re-election so shame is clearly a word that is not in his vocabulary.

This is a useful lesson - with two relevant postulates - for those interested in the public utility of political economic & economic policy lobbying.

Postulate #1: Disastrous [aggregate] decisions are most often the result of influential people pursuing partisan squabbles and neglecting the long-range interests of electorates?

I'll wager that few experienced REAL scientists would argue with that conjecture, and few experienced military strategists either. (Almost all economists simply don't count, since they ONLY make theories, and NEVER realistically test them, let alone adjust them in real-time to ages old - let alone emerging - operational results.)

Postulate #2: This illness of factional friction vs aggregate coordination is a disease to which governments - and electorates - of all kinds, including democracies, are fatally susceptible?

Of course. Any arguments? Hardest thing for any aggregate to do is both grow it's numbers AND better organize them ... simultaneously.

How do we reduce our susceptibility to that fatal, distributed tendency for aggregate policy development practices to dissociate vs further coordinate?

Any suggestions? Hint. I'll also wager that the most productive adaptive step we could make most likely involves some recursive process tuning. Where? Working on a process step buried somewhere near 5 steps back (plus or minus 2?) in our interleaved, "cultural-recombination" development cycle for raising new citizens.

Here's one of many possible approaches, asking "why" 5 times in succession, to arrive at one fundamental blunder in our approach to constantly refining aggregate education.

Step -4) Ok, so why aren't all voters previously steeped in enough system science and aggregate policy-selection science to select better political "leaders" - instead of settling for lawyers competing to avoid local risk for non-cooperating factions?

(Because scientists and system scientists in particular don't get enough training or practice at crossing traditional boundaries and applying well known scientific methods & insights to tuning emerging policy questions, and also to circumventing non-scientific social taboos?)

(Because our education system trains all students in constraining, task-oriented service habits, instead of aggregate-outcome-based teamwork. We are still Context Nomads, wandering into new contexts every year, but we no longer train our own children to embrace the full-spectrum task of approaching net-context exploring ALL aggregate options. We've balkanized our own electorate, by training all citizens as specialists who tend to know more & more about less & less, until too many know everything about next to nothing?)

In short, one suggestion - out of many options - is to go back to OBT&E, and find any & all ways to KEEP that approach, throughout all aspects of cultural education. Humans were successful nomads throughout history. Surely we can reclaim enough of those skills to remain successful Context Nomads.

Maybe some Russians read Warren Mosler's blog, and understand at least parts of it better than the gold-std zombies at ZeroHedge do.

According to Russian newspaper Vedomosti, Russian presidential adviser Sergei Glazyev proposed 15 measures to protect Russia's economy if more US sanctions are imposed. Some of the notable ones are listed here.

Russia should withdraw all assets, accounts in dollars, euros from NATO countries to neutral ones

"It is rather for us to be here dedicated to the great task remaining before us -- that from these honored dead we take increased devotion to that cause for which they gave the last full measure of devotion -- that we here highly resolve that these dead shall not have died in vain -- that this nation, under God, shall have a new birth of freedom -- and that government of the people, by the people, for the people, shall not perish from the earth." ~Abraham Lincoln, The Gettysburg Address

These are expressions of mutually exclusive principles of social and political philosophy that define the difference between the left and right — economic liberalism based on republican propertarianism and elitism and democratic social liberalism based on egalitarianism and human rights.

In the view of the right, distribution is exclusively an economic matter to be determined in the competitive marketplace in which all compete equally and the most meritorious reap the greatest success from their own superior qualities.

In the view of the left, distribution is a social and political matter as well as an economic one, and perfect competition does not exist under capitalism in a monetary production economy that is influenced not only by market-based exchanged but also cultural and institutional factors that result in asymmetries that direct outcomes with respect to status, power, and accumulation.

The argument is over the balance between liberty and law and order, which is the distinction between libertarianism at one extreme and authoritarianism at the other, and between personal freedom and cultural convention expressed as custom and tradition, which is the distinction between social liberalism and social conservatism, with radicals at one extreme and reactionaries at the other. The tension among these poles modulates historical change dialectically.

A fundamental issue is the degree to which economic liberalism is compatible with political liberalism, and other is the degree to which social liberalism is compatible with cultural continuity. This implies a critique of the feasibility of alternatives.

Different people fall into different quadrants and different positions within the quadrants, so it is impossible to find outcomes that please everyone. Therefore, the need to address the "tyranny of the majority" in a popular democracy.

The way we do that now is through asymmetrical status, power, and wealth, tilting the playing field toward an elite.

If the desire is to change this, the questions then become, what are the options, and what are the advantages and disadvantages of the anticipated outcomes.

Neoclassical economists assumes a market with no government, no banks, and no intruding social, political or economic institutional arrangements that supervene or strongly influence, in which there is near perfect symmetry among individuals with respect to all relevant information and bargaining power. It's not even correct to call the model built on such assumptions simplistic. It's a fantasy world.

This issue, like most, is much more complex that most narratives make it out to be. There is no such thing as an economy that is the subject of study of the discipline of economics. "The economy" is a conceptual construct that is built on assumptions that characterize one methodological approach among many other existing approaches and many more possible approaches.

The conventional approach that starts with the problem of scarcity rather than the distribution of a surplus defines the problem and therefore constructs the subject of study based on a set of assumptions that assume certain things as relevant and assume away other things as irrelevant. Conventional economics assumes a cycle of production, distribution, and consumption in which distribution is handled by the invisible hand of the market, which is presumed to be optimally efficient to the degree that it cannot be improved upon.

Only those institutional arrangements are appropriate that advance market efficiency or economic efficiency more broadly considered. For example, intellectual property like patents, copyright and trademarks, are considered to advance economic efficiency through creating incentive — even though they also create asymmetric market power. The corporation as a legal person capable of owing property in perpetuity is another. There are many more. The proof of their efficiency and effectiveness is in the innovation that they bring and growth they produce.

Opponents object that this disregards negative externalities that are socialized, ecological, environmental, social and political, in addition to economic. The so-called free market as a mechanism of price discovery and efficient distribution is a myth. Actual practice, such as administered pricing that now predominates, and legal and institutional arrangements that dictate winners and losers reveal that markets are not as represented.

They cannot be made free either, any more than friction can be eliminated from physical systems owing to the construction of modern society and its institutions. "Liberalization" simply increases the market power of factions in that social, political and economic asymmetry cannot be eliminated from individual relationships any more than friction can from the physical world. The idea of a market in which all participants are symmetrical in information, power, and influence is a fantasy.

Once this is recognized and acknowledged then that problem of allocating scarce resource comes to be seen in a different light, where the surplus a society creates is social rather than an aggregate of the contributions of individuals competing equally on a level playing field. Just it was a social and political issue initially about what institutional arrangements to create to produce results that are effective and efficient according to defined criteria; so too, is it a social and political issue to distribute those results in a way that takes into account that certain participants were favored in order to produce the optimal results.

The notion of redistribution is a matter of responsibility where there is a right to use private property for economic gain in addition to subsistence. Since individuals characteristically do not rise to the responsibility, it becomes necessary to undertake it institutionally.

Economically, the issue may be seen as addressing scarcity in the optimal way to achieve efficiency and effectiveness in accordance with defined criteria (norms). However, in the larger context of a society social, political, legal, institutional factors must be considered along with the economic factors.

In addition, open national economies must be considered relative to a closed world economy. Given that modern economies are interdependent, e.g. with respect to resources, and humans inhabit the same global ecology in which externalities play a fundamental role socio-economically, addressing scarcity and abundance becomes a human issue, involving human rights, and a global issue with respect to context.

These opposing views are based on conflicting ideologies. Paradigms provide the context for the development of ideas within the bounds of a universe of discourse. All ideologies are paradigms of a sort in that they define a universe of discourse through a framework of methodological rules in which assumptions are included as ideological norms. Theorems are deduced from these starting points as defining norms. Any conceptual system that privileges its assumptions from error or question is dogmatic rather than scientific. Dogmatic ideologies characterize phenomena like religions and they can persist with little change over long periods of time. Science, however, is developmental and reacts to changing circumstances like new knowledge and changing context.

Moderns generally agree that the scientific approach is superior to a dogmatic one. However, all discourse takes place in terms of "webs of belief" (W.V.O. Quine) that are defined by assumptions that function as norms. Key assumptions functioning as norms are considered first principles and taken to be self-evident and non-negotiable. Being privileged from error or even question, they are non-empirical and non-scientific. Almost everyone is dogmatic about key fundamentals.

Once a debate argues down to opposing first principles the parties either agree to disagree, or they come into conflict unless they can compromise. Compromise is of the essence of the democratic process of governing as the only way to accommodate the range of views is a complex society. This is an ongoing process in that context is ever-changing and it is an unfolding process owing to discovery, invention, and innovation.

The two views of liberalism, which might be characterized as economic liberalism and social liberalism, have been in conflict since the dawn of liberalism in the Enlightenment. The road since then has been rocky and it is no less so now. Much ink has been spilled over this, but now it is Thomas Piketty's work that is the contemporary catalyst for a debate that is getting underway.

Are economic liberalism based on property rights and social liberalism that includes egalitarianism and human rights possible to achieve simultaneously through a political process given the institutional arrangements in place? If yes, what are the obstacles to achieving this? If not, what needs to change if this is a desirable goal? Can political compromise achieve it without conflict?

The American dream should be built on expanding opportunities for the entire society, which can only come about if average real wages go up. Earning more than your parents is as much or even more a result of the rise of wages after inflation across the economy as it is a reflection of income mobility. In other words, if you are born into the bottom quintile but real wages rise, you will likely exceed your parents’ income even if you remain in that quintile....

The New York Times just published calculations based on the detailed data collected by the Luxembourg Income Study that show middle class incomes in America are now lower than in some other nations. And Sawhill shows that out of every three adults who were children in 1968, one is earning less than his or her parents did. That latter number is troublingly big, and since the Great Recession it has probably risen.

What we now know is that we can’t rely on income mobility to solve these problems. Because there has been growth, if modest compared to earlier times, about two out of three children are doing better than their parents. But many of them are not doing much better—about half of this group remain in the same quintile they were born into. Indeed, rising income inequality also makes it harder to move from one quintile to another: the rungs on the ladder are farther apart....

Yet for all this, the problem of inequality is an inadequate description of the situation. Inequality has traditionally meant that incomes at the top grow faster than the next category down, which in turn grow faster than the next category, and so on. All categories can grow to some extent. As has been apparent to economists for several years, however, this is no longer the case. We now have stagnating incomes for a large majority of Americans and runaway incomes at the very top—especially the top tenth of the top one percent. This is not so much “inequality” as a complete lack of growth for much of the country. And this is what the nation should focus on.

I agree that now is the time to drop the austerity meme and focus on growth, which has been lagging through this weak recovery if it can be called that yet. However, I think he then goes off the rails with this:

There is simply no escaping the central fact that the welfare of Americans depends on faster economic growth. Progressives and conservatives should agree on this.

The issue as I see it is growth measured as per capita GDP versus distributed (shared) prosperity. The capital share and labor share are out of whack. Let's focus on the reasons for it, such as managerial capitalism, managing toward stock price, tax policy, privatization, deregulation, etc., much of which can be attributed to neoliberalism as a social, political and economic ideology directing policy. No matter how much per capita GDP increases, the distributional share will not change without a change in policy since it has become abundantly clear over decades that the trend is toward increasing capital share over labor share through all possible means.